**Top Dividend Stocks to Avoid in SCHD Portfolio**
The Schwab U.S. Dividend Equity ETF (SCHD) is a popular investment option that tracks the Dow Jones US 100 Dividend index, focusing on companies with strong dividend yields, a history of dividend payments, healthy financials, and profitability. While the index is well-constructed overall, there are certain pitfalls to be aware of, especially when it comes to selecting individual dividend stocks for your portfolio.
One notable weakness of SCHD is its lack of exposure to Real Estate Investment Trusts (REITs). For dividend investors looking to diversify their portfolios and capitalize on the current market environment, incorporating some REIT exposure may be beneficial. An alternative option could be to consider adding the Cohen & Steers Quality Income Realty Fund (RQI) to your investment mix.
As an active investor, I prefer to hand-pick my securities based on specific criteria such as price, timing, and value. Unlike passive investors who rely on ETFs to provide a basket of stocks at current prices, I believe that paying attention to price is crucial for achieving disproportionate returns relative to the risk taken—a core principle of value investing.
Numerous successful investors throughout history have emphasized the importance of price in investment decisions. Quotes from investing legends like Ben Graham, Warren Buffett, and Charlie Munger underscore the significance of paying the right price for a stock to maximize returns and mitigate risks.
While SCHD applies filters to select quality dividend-paying stocks, there are some drawbacks to its methodology. For instance, the index may include stocks based on their historical dividend yields without considering their current valuations. Additionally, the reliance on return on equity as a measure of earnings quality may not always provide a clear picture of a company’s financial health.
In contrast to ETF investing, our approach focuses on combining value and momentum strategies to identify undervalued stocks with positive price trends. By utilizing tools like Dividend Freedom Tribe (DFT) charts to track historical yields and the 200-day simple moving average for price momentum, we aim to capitalize on market inefficiencies and optimize investment decisions.
When evaluating the 100 constituents of SCHD, we filter out stocks with minimal weight in the portfolio and focus on the top holdings representing the majority of the ETF. By analyzing key metrics such as dividend yield, historical yields, dividend growth rates, and momentum scores, we identify the best and worst buys in the current market environment.
Among the top dividend stocks to avoid in the SCHD portfolio, five stand out as unattractive investments due to their overvalued prices and negative momentum. Companies like Valero Energy, Fastenal, Tapestry, Watsco, and Coca-Cola exhibit concerning trends in their dividend yields, growth rates, and price movements, signaling potential downside risks for investors.
For example, Valero Energy has seen a significant decline in its stock price and dividend yield, indicating a possible correction in the near future. Similarly, Fastenal’s recent price movements below the 200-day SMA raise caution flags for investors, suggesting a negative trend in the stock’s performance.
In conclusion, while SCHD offers a diversified portfolio of dividend-paying stocks, it’s essential for investors to conduct thorough research and analysis before making investment decisions. By incorporating value and momentum strategies into your stock selection process, you can avoid potential pitfalls and optimize returns in the long run. Remember, price matters, and buying stocks at reasonable valuations is key to successful investing.